Gamma sign

16 Jun

Like the other Greeks, gamma can be either positive or negative. Here is one key difference to remember: positive gamma positions will see their gains accelerate and losses decelerate while negative gamma positions will see their gains decelerate and losses accelerate.

Any time traders buy options they acquire positive gamma. Think of the behavior of a long call or put for example. If I buy a call option and the stock rises in value, the call will move deeper in-the-money, causing its delta to grow and thus my profits to accumulate quicker. Alternatively, if the stock falls, the call will move further out-of-the-money, causing its delta to shrink (towards zero) and thus, my rate of accumulating losses will diminish.

Positive gamma, then, is the property of options that makes purchasing them so alluring. If you’re correct, your rate of profit accumulation will surge. If you’re wrong, your rate of accumulating losses will diminish. Not a bad proposition.

When traders sell options, they acquire negative gamma. Strategies like covered calls, short puts, vertical credit spreads, and iron condors all possess negative gamma. As mentioned above, that means that if the stock moves adversely, all of these types of strategies will see the rate of loss accelerate (e.g. the delta position gets bigger). Conversely, if the stock moves in a favorable direction, the rate of profit accumulation gets slower and slower (e.g. the delta position gets smaller).

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